Martin Lewis: 10 things you need to know about debit cards

Martin Lewis: 10 things you need to know about debit cards

Debit cards can be debt cards too. The competition watchdog's set out plans to cap fees for busting your overdraft limit. This should help, but don't wait.

Overdrafts are a debt like any other, and the key is to cut the rate, repay faster and avoid any penalties.

Most people's overdrafts aren't huge. My snap Twitter poll found 46% are under £250. Yet even then fees can be horrid.

With some accounts, a constant £200 overdraft would cost you £365/yr. So even if you only dip in, you need to sort them.

Here are my top ten things you need to know.

1. Get PAID £100 to get a 0% overdraft

Best for overdrafts under c. £500 www.Firstdirect.com has won every customer service poll I've ever done, and 89% of its overdrawn customers rate it 'great'. It offers accepted new switchers £100 (paid within around 28 days) – that'll clear some of your overdraft to start with.

Then for the remainder it gives a standard £250 interest-free overdraft (above £250, but within your limit, it's 15.9% EAR, still relatively cheap). It's a clear winner for those with overdrafts that never go over £350, and still likely best even if you owe a little more but intend to clear it.

Do you qualify? You need to pay in at least £1,000/mth (equivalent to £13,100 salary) to get the bonus and ensure there's no fee. Like all banks, First Direct does a credit check when you apply.

2. Free £150 bank switch bonus

Best for those who just dip into their overdraft If at the end of the month you occasionally slip into overdraft, www.co-operativebank.co.uk (70% rate it 'great') is a decent alternative. It currently gives an £150 switching bonus.

If that’s enough to clear your overdraft so you needn’t touch it again, it’s an easy win - especially as you can also get up to £5.50/mth on its Everyday Rewards scheme (you need to fulfil some criteria). If not, its authorised overdraft is 18.9% EAR, not bad for small amounts, but the bigger it gets, the costlier.

Do you qualify? You'll need to pay in at least £800/mth (equivalent to £9,850 salary) and switch at least four direct debits to get the £150 bonus.

3. Switch to 12 month 0% bank

Good for those with Bigger overdrafts.

New customers with www.nationwide.co.uk’s FlexDirect (77% rate it 'great') get a year's fee-free overdraft. There's no set limit – it depends on credit score – but anecdotally its limits are decent (if you pass the credit score), as mattboliver tweeted me: "@martinslewis Matched my old one - £1,200. Implied I could have asked for more, but the point was I wanted to pay off."

After a year, it's 50p/day, less than other accounts charging daily fees, but even so, use that time to budget to clear the overdraft debt.

Nationwide doesn't require a min pay-in for its 0% overdraft, but you need pay in £1,000/mth if you want its 5% in-credit interest (equivalent to £13,100 salary).

4. You can SHIFT overdrafts to special 32mth 0% credit cards too

A few specialist money-transfer cards let you pay cash into your bank to pay off your overdraft, then you owe them instead. This is useful for big overdrafts.

My top pick is www.virginmoney.com, which gives accepted customers 32mths 0% for a one-off 1.69% fee (min £3) of the amount shifted. Need longer? www.tescobank.com is 40mths 0%, but with a higher 3.94% fee.

Overdraft charges for busting your credit limit are the only thing that give payday loans competition for cost. With fees of up to £6/day or £15/transaction, they can mount up to £100s or £1,000s a year.

Reports of the death of bank-charge reclaiming have been exaggerated. It can still be done, though now you need to be in financial hardship to claim. Full step-by-step help and template letters at www.moneysavingexpert.com/reclaim Claire emailed: "I'll get 6 years of charges back and a goodwill £70 on top... total £865. Thanks Martin."

6. Shift your direct debits to minimise fees

Ask companies you pay to shift your direct debits to just before you're paid. So if you’re paid on the 25th, aim for the 20th. This artificially boosts your balance, so you're in the red for less time, meaning fewer charges – but budget carefully and don't forget those bills are coming.

7. Manage your way back into credit

Do a money makeover, checking everything you spend money on to see if you’re overspending such as energy, insurance, phone, broadband and more. Many can save £1,000s. Then do a detailed budget and stick to it. Full help to do this at www.moneysavingexpert.com/moneymakeover

8. Compare overdraft debt rate to the other debt, repay highest interest first

If you've multiple debts, write a list of what you owe, then see which costs most, adding up interest and fees for true costs.

If your overdraft's the most expensive, make minimum payments on all other debts, and focus on using incoming cash to clear that. If it's not the costliest, stay in your overdraft (but never bust your limit) and use spare cash to pay as much off the costliest as you can. Once the most expensive debt is cleared, you're ready to tackle the next, and so on.

9. Savings usually pay you less than an overdraft costs

A £1,000 overdraft costing £20/mth equals £240/yr, but the same in easy-access savings earns a paltry £15 at best. So repay debt with savings and you're £225 per £1,000 up each year.

You may think: "But I'll have no savings if the boiler packs up or the roof falls in." True, but if an emergency strikes, you can go back into overdraft and you'll be no worse off.

10. Struggle to control spending? Shift to a no-overdraft account

Basic bank accounts provide a no-frills, no-overdraft current account service. So clear your current overdraft and you could move to one.

They used to charge fees if you spent more than you had, eg, for unpaid direct debits, but since January those have stopped. If you spend when you've not got money, it'll still be rejected, but now there's no charge.

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